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Federal Government Financing Alternatives

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Entrepreneurs and small companies often overlook two ripe sources for capital: federal grants and loan financing.

But instead of trading equity positions in their companies for thenecessary capital, entrepreneurs and small companies who pursue fundingfrom the Small Business Administration (SBA) and from Small BusinessInvestment Companies (SBICs) donít have to deal with an equitycomponent to their transactions. However, similar to individual ìangelîinvestor and VC financing, companies seeking SBA and SBIC financingneed a strong management team and value proposition, and a credible andexciting business plan to consummate a financing transaction.

That's because an SBA loan, regardless of whether it is a directloan from the SBA, or, more commonly, a bank loan guaranteed by theSBA, is essentially a bank loan. The benefits of it versus atraditional bank loan are that it offers a lower borrowing rate and asomewhat greater ease of attainment for startups and smaller businesses.

In most cases, the SBA will guarantee that 90 percent of the loanwill be repaid to the bank. As such, banks are taking on less risk andcorrespondingly are more flexible with approvals. The SBA does usuallyrequire that the founders of the company personally guarantee the loans.

Alternatively, Small Business Investment Companies (SBICs) areprivately organized corporations that are licensed and regulated by theSBA. Small or emerging businesses which qualify for assistance from theSBIC program can receive equity capital and/or long-term loans fromthese companies. Essentially, these companies provide their owncapital, which is then supplemented by federal funds, to the companiesthey fund.

In a testament to the great "multiplier" value of small businessinvestment, U.S. taxpayers benefit from the SBIC program as taxrevenues generated from successful SBIC investments have more thancovered the cost of the program. Equally impressive, over the last 20years, small businesses have created roughly three out of four net newprivate non-farm U.S. jobs, with a significant percentage of thesebusinesses initially seeded/funded by these government loan programs.


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Mitch Mitchell says

In addition to SBA programs there is a time honored financing mechanism available to emerging government contractors: factoring receivables. No equity is in play, no liability is added to the balance sheet, it can be obtained within days of applying, and funding happens within hours of invoicing.

Many young government contractors have turned to a factoring company to help build their business.

Posted at 7:55 am
Linda Garland says

HOw do these companies look at companies in Chapter 11?

Posted at 8:33 am
Mitch Mitchell says

Regarding bankruptcy - Factoring companies can finance businesses in reorganization, but, first they require permission from the court as part of the reorg plan. Since the decision to fund is based largely on the creditworthiness of the customer or account debtor, the borrower's financial condition may be compromised but still viable.
Posted at 10:35 am

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